Monday Note

Let’s kill a myth. The dream of a compact newsroom, able to output a high-intensity general news website doesn’t fly. Numbers simply don’t add up. And here is why.
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First, the cost structure of a daily. In a typical operation, the biggest costs are industrial ones: around 25%-35% for paper and printing; another 30%-40% for distribution; around 18-25% for editorial; the remaining 10-15% are for administrative and marketing expenditures. It varies from country to country but we can safely assert most of the costs — at least 60% — are industrial in nature. Evidently, that part disappears when going online.
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Now let’s compare three numbers:
a) the cost of an online newspaper,
b) the audience needed to absorb costs
c) the audience of the biggest website
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Journalists make up most of the costs of a pure digital newsroom. As an example, assume the “loaded” (salary, benefits, expenses, overhead) cost of one journalist is about 60,000 € per year.  If the objective is to provide a general news site, the starting point for a comparison is the print press. As an high end instance, a newsroom such as the New York Times’ still counts 1400 journalists, paper and digital operations included (they tend to merge).  The Los Angeles Times now has 720 after the deep cuts demanded by its new owner (10 years ago, the headcount was 1300).  The Washington Post has a staff of 600.
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These are extremes. As a credible metric, we can take a big national European newspaper with an editorial staff of 400 to 500 people. For today’s demonstration, we’ll assume many people are involved in print-related production such as sub-editing, graphics, layout, etc. Plus, we all now those newspapers newsrooms are not exactly hallmarks of productivity. In short, I am certain we can produce good quality general news coverage with one hundred full-time equivalent dedicated journalists. (For their opposite reasons, editors and bean-counters are going to yell at me, that’s a good sign). I’m including writers, reporters, editors, photo and graphics editors, part-time specialized free-lance and front page editors.  Annual personnel costs: €6m. To this, let’s add an arbitrary $1m for technical and infrastructure costs, €2m for marketing and another €1m for administrative costs and misc. Total: €10m per year.
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Question: how many unique visitors do you need to cover €830,000 every month? Well, based on an analysis of some news websites (plus couple of business plan on my hard disk), the average revenue par unique visitors per month appears to range from  €0,10 to €0,25 (let’s forget the euro/dollar conversion for a moment, and assume both currencies have the same purchasing power in their respective countries). Let’s be conservative and stick with the lower number. No need for a calculator, then:  Translated into Unique Visitors per Month, a €830,000 monthly burn rate requires a hefty 8.3 million UV per month to break-even (and I’m not even talking of remunerate the cost of capital, paying back the shareholders, and forget about arousing analysts).
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Now  let’s turn to the table below; it shows recent traffic data (as much as we can reasonably get some — see Monday Note #51 for comments on this issue).
I’ve excluded websites tied to a major newspaper.
- The Huffington Post:  4m UV (Nielsen) 6mUV (claimed)
- Slate.com:   <3 mUV
- Tech Crunch:  3.2 mUV (claimed)
- The Drudge Report:  3 mUV (Nielsen)
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Now, big newspapers with great brands (Nielsen figures):
- New York Times online:  21 mUV
- USA Today :  11 mUV
- WashingtonPost.com:  9 mUV
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And in France:
- LeFigaro.fr:   4.2 mUV
- LeMonde.fr:  3.5mUV
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You get the picture: We are not here, yet.
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In the world’s biggest market (the US), if the goal is the online equivalent of a daily newspaper, no independent, pure player, general news website is able to achieve even half of the break-even revenue required to just stay afloat. Only big news brands, powered by (still) immense newsrooms are able to pull in decent audiences (remember, we are talking of audience goals able to support a newsroom set at a fifth of big newspaper’s).
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Let’s now compare the revenue per Unique user on a annual basis –  i.e. between €1,2 and €3 — and the revenue of big, quality free newspapers such as 20 Minutos in Spain and 20 Minutes in France. (I gave up doing a comparison model with the paid press, too many variables, too different models). Both are n°1 in their market with more than 2.5m readers per day. Their revenue comes only from ad pages, there is no distortion coming from the copy-sale revenue.  20 Minutos made €46.8m in 2007 and the French 20 minutes €45m. It means that each reader brings more than €18 per year. Compare this to € 1,2 per year per UV for online sites above.  By switching online for general news, we are trading euros (or dollars) for cents, literally.
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Still, this is no reason to hang on to an inexorably shrinking print media. Yes, there are ways to slow down, not reverse, the decline of newspapers: combining online and offline operations, adjusting  variables such as distribution (volume, distribution, timing), pricing to audience expectations and structure, etc. But the future lies in drawing the picture of a news organization compatible with the new economics describe above.
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Therefore, what does a sustainable online news organization look like? One thing is sure already: news is no longer able to sustain itself. The game becomes finding “alternate subsidy” streams. In the old newspaper model, Sports section advertisers subsidized the political columnist, or the classified pages paid for our guy on the ground in Iraq. Now, Sports coverage has migrated to a sports-site (and even disseminated on sub-specialized outlets), and classifieds moved to a vast array of highly profitable sites. Politics content finds refuge on the Huffington Post or on Slate. (And the guy in Iraq can only be afforded by big news organization). In passing, this dissemination is a response to the question of separate sites/brands for specific target groups: the answers seems to be yes — as long as we can: a) take advantage of specialization to charge higher CPT and b) build a network of sites arranged to benefit from massive economies of scale (back-offices, tech, sales, administration).
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This is similar to the transformation forced onto the music industry: it had to find other sources of revenue to compensate for the erosion of its core product.  Media have to find other income streams derived from their core competencies. The tech niche for instance, thanks to its peculiar DNA, is doing well. On the US market, many sites enjoy high CPT, a reasonable independence vis-à-vis their subjects, and are good at finding other sources of income: TechCrunch for instance is making more money from its yearly conferences than from its page views, although the scale remains small.
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My guess is corporate money will inevitably percolate into news economics through service contracts, requests for expertise, corporate communication assignments. The boundaries between sectors will blur. It already happened in the universities where contract-based private grants co-exist with fundamental research — and to some extent subsidizes it. The same mechanism will occur in the news business. We might not like it, but we better get used to it. Within ten years from now we’ll see respected online news organizations drawing half of the revenue form business-to-business type of activities. The tricky challenge will be erecting unbreakable Chinese wall between activities. Something similar to what Wall Street firms do: investment banking are separated from trading activities, they are not to talk to each other. This will require strong enforcement of corporate governance aimed at the protection of editorial independence.  It also implies decisive mindset changes in union and corporatist circles.  (In France, newspapers will be extinct long before such an evolution.)
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Another question comes up: How will hybrid news organizations stand up to pressure from financial markets? Analysts don’t like subsidized business units, even if the overall profitability is in acceptable range. Sooner or later, they come back with a vengeance, beat the stock price down until the business jettisons the unprofitable units.
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Take the Washington Post Company ($4bn in revenue in 2007, $477m in operating profits). The flagship products, the main brands are its publications : the Post itself and Newsweek. But its Kaplan Inc. unit, an education services company for students and professionals acquired 15 years ago is the big cash-cow: in 2007, it accounted for 49% of revenue (annual growth of 21%) and in 2008, it will surpass all other business units combined (publishing, TV, broadcasting).  The newspaper operation accounts for less than a quarter of the total revenue but, even if it remains marginally profitable, it is ailing. Two figures summarize the problem: in 2007, the Washington Post lost $77m in print ad revenue and got for a slim increase of $6m in online advertising. That’s a 100:8 ratio! Fortunately for the group, most its shares (60%) are controlled by insiders. But Wall Street punished the stock, it dropped by 30% in a year. Even though the group presents itself as “a diversified education and media company” (in that order), analysts sees “media” as a red flag.
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This leads to the final question: is the publicly traded form compatible with the massive shifts we are facing in the media business? As Alan Mutter reported on his blog early September, McClatchy group (stock: -78% in a year) might go private. So could do Gannett, Lee Enterprises and the New York Times Co, wrote Mutter in July. Some of these media groups combined a collapsing stock price with a heavy debt burden. Even when news media groups are not in such dire state, they all realize the label “media” (or worse “newspapers”) is stamped on their brand.  As a result, they will be punished by the stock markets — that is quite an incentive to consider a privatization. –FF
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